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Chapter 5: Q6BP (page 495)
Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?
The price to the public will be $22.11.
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The Robinson Corporation has $43 million of bonds outstanding that were issued at a coupon rate of 11戮 percent seven years ago. Interest rates have fallen to 10戮 percent. Mr. Brooks, the vice president of finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of an equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 2.4 percent of the total bond value. The underwriting cost on the new issue will be 1.7 percent of the total bond value. The original bond indenture contained five-year protection against a call, with a 9 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the after-tax cost of new debt rounded up to the nearest whole number.
c. Calculate the present value of total inflows.
Question:The yield to maturity for 10-year bonds is as follows for four different bond rating categories:
Aaa 9.40% Aa2 10.00%
Aa1 9.60% Aa3 10.60%
The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Refer to 鈥淪emiannual Interest and Bond Prices鈥� in Chapter 10 for a review if necessary.)
Do corporations rely more on external or internal funds as sources of financing?
What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)
What is the difference between a bond agreement and a bond indenture? (LO16-1)
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